Shame on me for my neglect. I’ve been wrapped up more than usual with the market, though, and have had a prolonged case of whatever horrible flu-like bug that’s been going around. But…

here’s Keeping Score for February 2025 and year-to-date. Not pretty reading for the US economy.

I spent close to a quarter-century as a professional equity portfolio manager. I was/am relatively aggressive. I tended to outperform my target index (most of the time it was the MSCI World) substantially in up markets. I gave back some in down markets, but a small enough amount that I also tended to outperform over the entire market cycle.

I used to tell myself every morning as I sat down at my desk that I had to take off my hat as a human being and put on my hat as an investor. This was in part an ethical issue, but In most cases, there wasn’t much conflict between my ethics and my buying. For example, cigarettes are addictive, which is a potential plus for profits, the counterargument being that smoking tobacco can kill people. But at the same time, the market for tobacco is saturated, the companies aren’t fast growers, governments in many parts of the world regulate sales and lawsuits abound. So I had no trouble staying away.

Another example” with new discoveries, drug companies appear to do substantial social good. But I find them totally opaque. Lowering their cost of capital, even infinitesimally, by my buying might be a good thing, but I’m the dumb money in this arena, so I stay away.

Casinos are more complex. They’re easy to analyze and arguably a form of entertainment and social interaction. Casino managements would argue that they’re like buying an opera ticket, except that in the latter case you have zero chance of getting any of your money back. On the other hand, it’s clear, at least in the case of online gambling, that the industry is supported by a relatively small number of hopeless addicts. Kind of line online heroin. So maybe something to stay away from.

In the case of Trump, the central issue for us as investors has nothing to do with his character or his past actions. It’s the policies he’s likely to enact for at least the next two years.

If I understand his intentions correctly, he has two main economic aims:

–to deport undocumented workers, and

–to make further income tax cuts for wealthy individuals and for corporations, offsetting these, at least in part, through cuts to expenditures on social services like Medicaid.

He has a social agenda as well: to demonize the LGBTQ community, which is maybe 5% of the domestic population, to satisfy Christian fundamentalists, who comprise three or four times that. My guess is that this is a significant economic minus, but I have no idea how large.

The domestic workforce is just under 170 million people, growing maybe 0.5% yearly. The Pew Research Center estimates that 8 million of these workers are undocumented. If Trump intends to eliminate 1 million of these in each of the next two years, that would cause the overall workforce to stagnate. So all the real economic growth in the US would come from productivity gains, which are running at about 1.5% yearly (better than that under Biden). Productivity is a function of better education and better machinery. Given the intended dismantling of federal education assistance, productivity gains will rely increasingly on capital investment. My guess is that, all other things being equal, it will be hard to get productivity gains of 1% yearly. This compares unfavorably with 2.0% yearly real growth during Trump’s first term and 2.3% yearly under Biden.

Tariffs are a multi-sided phenomenon. They raise the price of imported goods brought into the US, giving protective covering to domestic firms in the same industry as well as the ability for them to raise their prices. Either way, prices go up–which creates inflation and slows down real growth. The home countries of industries subject to US tariffs will most likely impose tariffs on imports into their counties from the US. Again, this slows the growth of export sales from the US and creates inflation abroad.

I don’t know the full story of the export tax on soybeans from the first Trump term. China shifted to an alternate supplier, Brazil, for much of its needs. Trump invoked a Depression-era law passed to prop up farmers after dustbowl-caused damage, with the result that all the tariff money collected went to offset the damage of lost Chinese sales. The net result was no financial gain for the US plus the damage done to the relationship with a big customer.

Tax cuts for the wealthy. The ultra-wealthy are the least likely to spend/most likely to save, so tax cuts for them are the least effective way to stimulate the economy. Tax cuts for ordinary citizens would be better. The real worry is that these cuts could boost the Federal deficit to the point where lenders–especially foreign lenders who can just as easily buy their home-country debt–begin to worry that there’s no way Washington will be able to pay them back. This fear would express itself in higher interest rates or a drop in the dollar–or both.

more tomorrow

I was pleasantly surprised at the relatively strong performance of NVDA in the pre-market yesterday when I was writing about the favorable market reaction to NVDA’s quarterly earnings announcement after the market close on Wednesday. That glow didn’t last very long after the opening bell, however, with the stock trading down by about 8.5% by the close–dragging other AI-related stocks down with it as well.

the issues

—earnings momentum. If a company posts quarterly earnings results that are getting sequentially stronger, meaning, say, +10% yoy, followed by +12%, +14%, +16%, two factors tend to propel the stock upward. They are: the earnings gains themselves and, crucially, the pattern of accelerating eps growth. This second is typically what causes the stock’s PE to expand.

The opposite of this last pattern, where eps growth is decelerating, typically causes the PE to contract. That’s the issue with NVDA.

—what everybody knows. NVDA has excellent financial disclosure, in my view. To anyone who has taken the briefest glance at the financials, the issue of decelerating earnings growth momentum has been clear for six months or more.

So I was especially interested in the latest NVDA results because I thought they would show how much of the multiple contraction issue had already been factored into the stock price. After all, NVDA had peaked at $150+ in early January and fallen by 18% since. So maybe this is what that decline was all about.

The pre-market yesterday seemed to me to be saying that, yes, investors had read the financials, knew that most of the company’s operating leverage had already been exhausted–and that therefore operating earnings would no longer be rising much more quickly than sales.

Regular trading yesterday said the opposite–that the decelerating eps growth momentum still surprised a significant number of holders.

Oh, well.

The issue now, as far as I’m concerned, is when to rebuy the shares I sold a few months ago. I don’t think there’s any rush, though.

NVDA

NVDA reported its latest quarter after the close yesterday. A lot of the financial press commentary was about the lack of operating margin expansion, which apparently came as a surprise to many.

Myself, I was much more interested in whether the stock price would go up or down when the company released the financials. I’d switched the bulk of my NVDA holding into Broadcom (AVGO) after the prior quarterly results announcement made it very likely, I thought, that the period of margin expansion was over for NVDA–because the company’s research and admin costs had become so small as a percentage of sales.

I thought there was a non-zero chance that, because public commentators on NVDA seemed unaware of this, the stock would go down when NVDA made the latest financials public. As I’m writing this, however, the stock is up a little in the pre-market–although it remains about 10% below its early January high. Good news for the overall AI sector, I think.

an aside about margins

Contrary to popular belief, even in the analyst community, high margins aren’t a clearly good thing. If anything, they’re a bad thing.

Two reasons:

–high margins attract competition, in this case from the in-house chip-designing operations of NVDA’s customers. My guess is that this is not a today issue for NVDA, but it has to be a worry down the road. This possibility is most likely the major influence in the company’s decision on how high to mark up its chip offerings over the price it pays TSMC to make them

–high margins can also be a sign of weakness. For example, a generation ago tons of furniture stores dotted the sides of secondary roads in the suburbs. The vast majority of these are long since dead, despite the fact that they had huge operating margins–well in excess of the 50% markup Tiffany charges for its jewelry. …the problem? These stores turned their inventories only once a year, so they had huge carrying costs.

rare earths

Canada, Greenland, Ukraine. The current administration appears to covet the mineral resources of all three, especially rare earths. I’d been scratching my head to figure out why, until I read a report that in retaliation for Trump tariffs placed on China during his first term, that country had cut the flow of rare earths to the US.

The “idea” is to somehow increase domestic oil production by 3 million barrels daily from the current 13.5 or so million. That will drive the world price down by–my guess is by15%-20%, but let’s just say by 10%–simultaneously encouraging higher petroleum usage and lowering inflation.

The oil revenue numbers that this supposition generates are as follows:

13.5 million x $75 = $1.025 billion daily

16.5 million x $67.50 = $1.112 billion daily

Not a huge difference in spending. In addition,

the US uses about 20 million barrels of oil daily, more than any other country in the world. The increase in domestic output would shrink our imports, much of it from Canada, by 3 million barrels as well. That would also improve our trade position by $70 billion+ yearly.

This isn’t the end of the story, though.

What happens to the 3 million daily barrels the US is no longer importing?

If we assume it just goes away–that is, that non-US producers decrease their overall output by 3 million–then the administration calculation is reasonable. To the degree that the administration has thought this through, this is what they are banking on. But how likely is that?

A related possibility, I suppose, is that the world stores the excess production. But this costs money and just kicks the can down the road.

The most likely scenario, in my view, is that the major oil companies yes Washington to death and do nothing to increase domestic production.

During the 1970s, for example, when OPEC boosted the oil price from below $2 a barrel to over $30, the US passed a series of laws aimed a controlling the price of oil produced from domestic wells. The price of “old” oil, that is, output from wells drilled before 1973, was capped at about $5 a barrel. The response of the oil majors was to cease production from “old” oil wells and to concentrate on “new” oil that could be sold at the market price. The industry was convinced, correctly, as it turned out, that regulation wouldn’t last forever and producing “oil” oil was like flushing money down the drain.

As it was back in the 1970s, the oil majors’ conduct will likely be colored by their assessment that the administration won’t be astute enough to figure out what’s going on and/or that the current administration won’t be around long enough to exact any price for their non-compliance.